Pensions consultancy LCP has urged the Government to make major changes to ensure that new inheritance tax rules are implemented fairly and effectively.

The firm has warned that the move by the government to bring unused pensions within the IHT net from April 2027 needs to be accompanied by a range of practical changes.

The company said that ‘death in deferment’ lump sums from DB schemes and small funeral grants from pension schemes should not be included.

LCP said: “While the justification for the policy is that DC pensions were being used (by some) as a vehicle to avoid IHT, the scope of the policy goes far wider. Given that neither of these systems is being used to avoid IHT, it seems unfair to catch them in the scope of the policy.”

It also said there are problems with having the person dealing with the estate (the ‘Personal Representative’) liable for ensuring that IHT is paid, because they may have no control over some of the funds.

It said one example would be a pension pot payable to a beneficiary who is not the Personal Representative. One option would be for the PR to be responsible only for IHT due on the rest of the estate, or for the PR to have the power to require the pension scheme or provider to deduct IHT before paying out.

LCP warned the new process could lead to a delay in money being released to those in need, including a widow or widower exempt from IHT. That’s because under the new rules, it’s not clear assets can be paid until the whole process has been completed and the Personal Representative knows the value of all pension and non-pension assets and how these are to be split between exempt and non-exempt beneficiaries.

There are also problems about the deadline for paying IHT, according to the firm. A Personal Representative has to ensure IHT is paid within six months and beneficiaries will face the effect of interest and penalties if that is not done. But they may be penalised for matters beyond their control, such as delays in obtaining information about fund values and about other beneficiaries.

LCP said given the time pressure on the process, more needs to be done to ensure that pension schemes become aware of the death of a member as soon as possible. Changes which could help include:

• Letting the Government’s ‘Tell us Once’ service share information with pension schemes and providers, saving the bereaved family from having to do this.
• Requiring registrars to share data about deaths more quickly and frequently than the currently monthly data feed.

LCP also suggested allowing the Personal Representative to apply for probate at once and for the application to processed in parallel with sorting out the IHT, to reduce delays in sorting out the affairs of a loved one.

Alasdair Mayes, partner at LCP, said: “The rationale for the policy was to stop DC pensions being used for avoiding inheritance tax. But the new rules will capture other types of pension rights, including certain lump sum death benefits from DB pension schemes, where there could be no suggestion that they are being used to avoid tax. These types of benefit should be excluded from the changes. 

“We also need to ensure that the new processes do not create delays in getting pension money to bereaved families. If the policy has to go ahead, much more thought needs to be given to minimising the impact on both grieving families and on pension schemes.”